First Impressions Matter: Signalling as a Source of Policy Dynamics

We provide the first direct empirical support for the importance of signalling in monetary policy by testing two key predictions from a novel structural model. First, all policymaker types should become less tough on inflation over time, and, second, types that weigh output more should have a more pronounced shift. Voting data from the Bank of England’s Monetary Policy Committee strongly supports both predictions. Counterfactual results indicate signalling has a substantial impact on interest rates over the business cycle, and improves the committee designer’s welfare. Implications for committee design include allowing regular member turnover and transparency regarding publishing individual votes.